DAVID GREEN: This cynical 'tax the rich' lie

The Lib Dems say the better-off must share the pain of austerity. In fact, as this analysis shows, the top 10 per cent - including many who are hardly plutocrats - already pay nearly 60 per cent of Britain’s taxes.Ever since the hurricane of the credit crunch began to lash the global economy, the pain of the downturn has been compounded by a powerful sense of injustice.

For one of the central themes in public debate about the present economic crisis is the idea that the rich have not been contributing their fair share to our troubled nation.

According to this view, the ordinary British people have borne the brunt through rising costs and falling living standards, while the wealthy have evaded any real impact of the slump.

Penalised: There has been the perception that middle Britain has felt the force of the credit crunch through rising costs and falling living standards, while the rich have dodged any real sacrifices

As the Budget approaches, the belief that more cash should be extracted from the rich is gaining further currency. Much of the impetus for this comes, of course, from the Liberal Democrats, anxious to parade their egalitarian credentials.

Business Secretary Vince Cable has been banging the drum for a mansion tax on properties worth more than £2 million, and if that fails, the Lib Dems are determined to see some other means of imposing a tougher tax regime on those who are regarded as affluent.

They want to keep the 50p tax band on those earning more than £150,000 a year. There’s been talk of introducing higher council tax bands to raise more municipal revenues from expensive homes.

Advocate: Vince Cable has long been championing the notion of a 'mansion tax'

And now they are considering a raid on middle-class pensions — scrapping the tax relief currently given on pension contributions by people who pay income tax at the higher rates of 40 and 50 per cent.

At the other end of the scale, the party wants to see the income-tax threshold raised to £10,000-a-year to take some of the lowest-paid out of tax altogether.

‘The Liberal Democrats want tax cuts for working people, not the rich,’ says the party’s president, Simon Hughes MP, using the language of class division that comes so easily to modern politicians.

Now, a few of the Liberal Democrats’ ideas might be perfectly worthy, particularly that of expanding the scope of the council tax to take account of the surge in values in the South-East over the past 20 years.

But, like so much of the debate about the contribution of the rich, the philosophy behind the Lib Dem approach is hopelessly flawed.

The belief that the wealthy — and, indeed, the not especially wealthy — are not paying their way is a fundamental fallacy which has poisoned rational discussion about our economy.

The reality is just the opposite of conventional wisdom. The better-off in our society make overwhelmingly the largest contribution to our public finances.

Moreover, far from allowing wealth to accumulate in the hands of a few — as so many politicians and commentators repeatedly claim — the state has actually pursued an aggressive policy of wealth redistribution, taking from the most prosperous and giving to the least well-off.

Yet in contrast to all the noisy rhetoric about economic justice, official figures recently revealed the true picture.

According to the independent Office for National Statistics, the top one per cent of earners will pay 27.7 per cent of all income tax in the year 2011/12. That translates into a total revenue of some £44 billion, a bigger sum than was raised last year from taxation on company profits.

Perhaps even more strikingly, the top 10 per cent of earners pay 57.6 per cent of all income tax. So there we have the truth in its starkest form: significantly more than half of income tax revenue comes from those in the top tenth of society.

And that’s not counting the extra two per cent National Insurance paid by everyone earning above £42,475, taking the top rate up to 52 per cent.

Anxiety: People are already feeling the effects of the economic crisis and raising taxes would be deeply unpopular

Reality: Statistics prove that the wealthy in our society make overwhelmingly the biggest contribution to public finances

And the burden on the upper echelons is increasing. In 1999/2000, the top one per cent paid 21.3 per cent of all income tax, compared with today’s 27.7pc, while the proportion paid by the top 10 per cent was 50.3 per cent, more than seven points lower than today.

Nor should it be thought that these high earners are all yacht-owning plutocrats and City financiers. We understandably rail at bankers and their gold-plated bonuses, but the fact is that the top one per cent of earners encompasses all those earning about £150,000 or more a year — a very comfortable income, yes, but we are not talking about telephone-number salaries.

When it comes to the top 10 per cent — which is made up of 2.6 million households — it includes all those with a disposable income of more than £55,675. The average income of the top 10 per cent is £105,580.

In other words, even if you have a relatively modest job such as a secondary school head or a GP, you are still in the group of earners paying the majority of Britain’s tax.

Thus, the belief that the state does nothing to redistribute wealth is simply wrong. In fact, redistribution has been one of the key aims of all governments, Conservative and Labour, since the Sixties.

Taxes used to be raised purely for the purposes of running the operations of government, like the police, schools and defence.

But in recent years, the tax system, along with welfare benefits, has become a gigantic instrument of institutionalised social engineering, with a dramatic impact on our incomes.

Burden: Those who have relatively modest jobs such as working as a secondary school head or a GP, are in the group of earners paying the majority of Britain's tax

To take one example: according to the Office for National Statistics, the top 20 per cent in British society earned 16 times more in 2009/10 than the bottom 20 per cent, before any tax deductions or benefit handouts were taken into account.

But once tax and benefits were included in the calculation, the earnings of the top 20 per cent were only four times higher than those of the bottom 20 per cent — a dramatic change.

Now some might welcome all this redistribution as part of the creation of a fairer society. But there are enormous problems with the process.

One is that the present tax and benefits system has become absurdly complex and bureaucratic, encouraging inefficiency and fraud. Most self-employed people, even on modest incomes, have to use accountants to handle their annual tax returns.

Moreover, the procedure of taking tax and giving benefits can become an exercise in pointlessness, especially for those in the middle.

If you earned £33,605 in 2009/10, the Government gave you £4,518 in cash benefits and took £12,686 in tax, leaving you with £25,437.

Absurd: The present tax and benefits system has become absurdly complex, which has encouraged fraudulent behaviour

But, according to the ONS, you would also have received benefits in kind — such as the NHS, education and other public services — worth £7,337.

When you add the value of these benefits in kind to your income of £25,437, you get to £32,774, which is almost exactly the same as you started with.

Would it not be better for the state to let you keep more of your money — to spend on the services of your own choice — instead of indulging in all this expensive manipulation?

The irony is that, while most of the affluent are paying far more than is often believed, there is a thin layer of the elite, right at the top, who are able to exploit the system to avoid their responsibilities, such as companies and international tycoons creating complex webs of off-shore accounts.

But again, it is precisely the burgeoning complexities of the system that have enabled them to do this. A more straightforward process, less fixated with social engineering, would be less open to such practice.

The greatest drawback of all is that the huge tax burden acts as a disincentive towards wealth creation. Ultimately, all our economic livelihoods and the very existence of our public infrastructure depend upon successful enterprise.

The eager impulse to keep imposing ever greater taxes on those at the higher end of the earnings scale is therefore utterly counter-productive, because it destroys the commercial foundations of our economy.

That is exactly what happened to Britain in the Seventies, when the effective income-tax rate on top earners reached 83 per cent, a punitive level that turned our country into the sick man of Europe.

It would be the height of folly to allow the social engineers in the Lib Dem and Tory ranks to force us back to those ruinous days.